XACC/280 Week-One CheckPoint

Accounting Assumptions, Principles, and Constraints

The three purposes of accounting are to record financial activities in a chronological order, to identify economic events, and to communicate the recorded information through reports (Weygandt, Kimmel, and Kieso, 2008). The focus of the reports will be placed on events deemed to be relevant to the health of the company. Financial information is reported in a linear, systematical way, showing all incoming revenues and outgoing expenses. The reports often take visual form in graphs and charts, but may often be combined with textual information. Accounting assumptions provide a foundation for the accounting process. Two main assumptions are the monetary unit assumption, which requires a company to record and present all business transactions in a monetary unit. This method eliminates information however that may be important to the business, such as quality of service and morale of the employees, as there can be no monetary value placed on such information. The second assumption is the economic entity assumption, requiring all activities of the company be kept separate and distinct from the personal activities of the owner and all other economic entities. Accounting information is prepared and reported in accordance with Generally Accepted Accounting Principles, also referred to as the GAAP. It is also agreed by most that there is a need for a single set of international accounting standards, or the iGAAP. With these standards in affect, all accountants apply the same principles. One important accounting principle is the cost principle, which dictates that companys record assets at their value (Weygandt, Kimmel, and Kieso, 2008). Many critics argue that the market value would be more useful to the financial decision makers. The constraints in accounting allow a company to modify generally accepted accounting principles without reducing the usefulness of the information provided in the financial reports. Two

constraints, materiality and conservatism, exist in the accounting industry. Materiality relates to an item's impact on the overall financial well-being of the company, while conservatism provides a reasonable guide in difficult situations. When in doubt, choose the method that will be least likely to overstate the company's assets and income. I believe that the principles of accounting set in stone the regulations to be followed by all individuals in the accounting practice. Without the principles to follow, there would be potential fraudulent reporting by companies who may be less than healthy in an attempt to keep the doors open for business. Accounting assumptions keep the financial position of a company separate from that of it's owner and investors. Without a solid accounting basis, I feel there would be several business in operation that would not normally be deemed a reputable company due to potential fraudulent activity in reporting.